What are the hidden dangers of leasing?
What should I watch out for when signing a lease?
Are you looking to sign a lease for your new offices? There lots of things to consider before you sign. Factors such as square metre cost, outgoings, body corporate fees and make good clauses can massively impact the affordability of the space from your point of view. There are many important questions you must clarify such as, how big is it? Is it accessible to public transport and have good parking? Is the existing air-conditioning sufficient and compliant?
The component which can affect our client drastically is the make good on exit of the lease. Often people don’t think of this, so they negotiate some great terms at the start and get some generous concessions – we can help you with this. You might be able to get 3-6 months rent-free or a contribution to the fitout cost. We had one client who managed to get two years at half rent because the landlord saw the value of what was being put into the building, with base building upgrades, new ceilings, new toilets & air-conditioning upgrades.
Not all landlords are that generous and they mostly don’t want to contribute, but if they do there’s normally a second part to that. It’s a poison pill which they insert in the make good on exit lease. We’ve come across some situations that are unbelievable in severity of make good requirements. One client we assisted had rented a premise in Tullamarine for 30 years. They took over as a brand-new tenancy as they needed more space and the obligation of their old lease was to make good on exit. During these 30 years, they had doubled the office size and put in new air conditioning, while paying the rent which would have repaid the building cost many times over. The make good clause meant that they had to reinstate the concrete car park to brand new condition; fair wear and tear was not factored in. Concrete after 30 years is going to have some cracks; concrete after six weeks can have some cracks! Our client was up for $250,000 to redo the concrete car park. On top of that, inside the warehouse they had to drill out all the dyna bolts that were put in for the racking, fill them with epoxy, then regrind and seal the entire concrete floor. They also had to demolish offices that had been installed about 10 years earlier. The landlord was using as a bargaining chip; what they really wanted was for the outgoing tenant just to buckle and hand over $250,000. Then they could just rent it out to the next person that would be very happy to have the offices as is.
A word of warning when you’re signing the lease, once you’re happy with all the terms of the agreement, you’re happy with the location, it’s great for your staff, you can grow your business, it’s all going to work – think about the make good clause on exit. Think about the cost of exiting the lease because that can be where the massive poison pill is.
A couple of clients that we have helped who are lawyers have put a condition in the lease that whatever the renovation is the start, becomes the landlord’s property and is known as ‘existing conditions’. They haven’t transferred the rights of ownership straight away, but it becomes existing conditions on end of lease. This ensures there can be no claim made on you as an exiting tenant.
If you have questions around this sort of thing, I’m not a registered licensed estate agent, but we are experienced workplace transformationalists and we know how to take your business from good to great, but we also run into this a lot and we’d love to help you avoid those pitfalls. Please give us a call!
Other videos in this series you may be interested in:
Are you being offered a fitout contribution by your landlord?
How do I know I am signing up to the best tenancy for me?